S&U dividend motors

Despite boasting a rising risk-adjusted yield, collections, customer numbers and underwriting standards, the stock's low valuation suggests some don't expect the good times to last. While nerves around consumer confidence and plateauing car ownership are real, we think the bear case is overdone.

S&U is best known as the owner of Advantage Finance, which provides consumer loans to around 1 per cent of the country’s used-car market and accounts for 94 per cent of S&U's loans. It’s one of the few parts of the automotive industry to have held up. According to the Finance and Leasing Association, the value of advances for used cars bought on finance rose 4 per cent to £18.3bn in the 12 months to November, while the number of deals edged up 2 per cent to 1.48m. By comparison, the number of new cars bought on finance dropped 4 per cent, as new car registrations dipped for the third straight year.

The used-car market is expected to benefit this year as in-demand plug-in and hybrid models filter into the secondary market, and Advantage's loan book managed an impressive 11 per cent rise in new deal advances between last August and early December – a period marked by consistently gloomy consumer confidence surveys.

Reassuringly, loans have grown as the company has introduced tighter underwriting standards. Advantage’s risk-adjusted yield nudged up to 25.2 per cent in the four months to December, despite lower used-car auction valuations and higher impairment charges on some older loans. A rebound in early repayments since the beginning of 2018 bodes well for the quality of recent loans. Meanwhile, increased regulatory scrutiny of the car finance market has been benign for S&U and rising standards could give it a competitive edge over competitors with lax practices.

The company's proactive and cautious approach is a common characteristic among family-owned companies. S&U is still run and more than 50 per cent owned by the family that founded it in 1938, including twin brothers Anthony and Graham Coombs, who respectively serve as chairman  and deputy chairman. This history hasn’t held back experimentation, however. In 2017, S&U started to offer bridge financing to the short-term refurbishment market, helping to diversify income through a division that can already lay claim to a profitable £28m loan book.